On Monday June 22nd, Greece extended an olive branch to its European creditors by proposing structural reforms to its welfare state.
European markets took a dive last week when negotiations stalled over how to best reform Greece’s pensions system. International Monetary Fund (IMF) negotiators, backed by the EU and Germany, insisted on deep cuts to benefits.
Many view it as Greece’s only path to fiscal sustainability—the surest way of hitting the desired budget targets. But having swept to power on a wave of populist rhetoric, Greece’s left-wing government is fighting to protect the country’s social safety net. (Source: The Wall Street Journal, June 22, 2015.)
After a week of tough negotiations, the Greek government made public its counter offer. Their plan would provide 0.4% in savings and revenue in the current year, with that number rising to one percent by next year.
IMF negotiators are currently reviewing Greece’s proposed pension reforms. The situation is grim as depositors are rapidly withdrawing cash from their bank accounts, sparking fears of a bank run. Approving the deal would effectively assure depositors that the Greek government will not default on its debt obligations.
Another way of handling the contagion is to impose capital controls. When Cyprus was in a similar situation in 2013, the government passed laws to limit daily withdrawals, stemming the outflow of cash.
Over the following two years, Cyprus’s financial position improved enough to warrant a policy reversal. (Source: British Broadcasting Corporation, April 6, 2015.)
In order to keep Greek banks solvent, the European Central Bank increased their access to emergency funding three times in the last week.
Capital flight is a potential stumbling block. Yet by midday, the European Stoxx 600 was up roughly 1.5%. Analysts believe the market has priced in a Greek departure from the eurozone. However, concerns are rising about spillover effects into Spain or Italy. (Source: Bloomberg, May 24, 2012.)
Despite the positive signs in favor of a deal, analysts are warning that Greece’s problems will resurface if the solutions are merely cosmetic.